Ideas to Action:

Independent research for global prosperity

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I’ve been mulling over this problem ever since I finished this paper with Arvind Subramanian. We conclude that to deal with the climate change threat to human well-being and livelhoods as we know them today requires an extraordinary technological revolution – not just reducing carbon content but completely eliminating it, i.e. completely severing the link between burning fossil fuel and generating energy. Our analysis: Energy poverty is so overwhelming today – so many people in India and China using as little as 5 percent of the energy services Americans enjoy – that there is no way to fulfill their energy “rights” as their economies grow without creating and deploying carbon-free energy.

Bjorn Lomborg has gotten some good press making the same point, though his argument is based neither on dry economics nor on careful growth and energy consumption projections but on politics and human psychology: that people don’t like to sacrifice and politicians don’t like to talk about burdens and burden-sharing – thus the climate risk is best dealt with by talking about technology and innovation instead of carbon cuts and taxes.

In America, Tom Friedman and others have encouraged this positive spin (Green Techies want to Shake the Climate Baggage): Let’s ditch the fear and guilt association of energy use (cap and trade) with climate and move forward with a campaign for an energy revolution built on American ingenuity and innovative drive. Let’s be Kennedy-esque about a stronger America – only this time with a focus on solar and wind instead of the moon.

Even the UN community is putting a happy spin on the outcome from Cancun. Despite the lack of any international binding agreement (and therefore no global carbon price on any horizon), China and India are taking their own steps, including feed-in tariffs and other subsidies for renewables, and then there is the teeny program called Clean Development Mechanism which allows rich world firms to offset their pollution via micro-projects (total trades amounted to a minuscule 1.6 percent of total global emissions last year) and forests are finally on the agenda.

It is true that this is better than nothing. But is it enough insurance against those risks already upon us (as David Wheeler shows convincingly in the first part of this paper)? No.

The problem is that all this technology talk focuses primarily on the supply side of the equation. And the demand side matters. Thus price matters. To reduce demand, consumers and producers will have to face a higher price for carbon (and other greenhouse gases) for two reasons.

First: The technology revolution needs inspiration as well as perspiration. Spurring private innovation requires a clear price signal. (Public spending on R&D matters too, but is too low.)

Second: There is the Jevons Paradox, discussed in this must-read December 20th New Yorker article [gated]. Jevons, a 19th century British economist, noted that increases in energy efficiency has historically led to more use of energy services (compare your energy-hog refrigerator to your grandmother’s icebox, your central air conditioning to grandma’s room unit if she was lucky, your car that you now drive 20,000 miles per year compared to your great-grandfather’s Model T used only for short Sunday drives). As energy use has gotten cheaper (and more pleasant – compare once more your Toyota Camry to that Model-T) we’ve grown accustomed to using more and more of it. Supplying more low-carbon energy at a lower price will lead to more use of energy – what is now called the rebound effect. So the price of carbon-based energy services has to go up relative to the price of non-carbon-based energy services – which takes us back to the technology revolution.

What are the options? Europe and the United States have medium-term fiscal problems that cannot he handled by spending cuts alone. Taxes or levies or fees begin to appeal. The payroll tax in the United States keeps labor costs high and undermines job creation – so Ted Halstead proposes Obama back substituting a pollution or carbon tax for the payroll tax in the 2012 campaign. And see David Wheeler’s idea: a CAT (carbon-added tax) for one or more states in the United States, since any one jurisdiction can introduce it (and it could be rebated to consumers).

Will 2011 see a U-turn in the climate discourse back to the dreaded word: Taxes?